The Bollinger Band Breakout Forex Trading Strategy is also a simple trading system to understand and implement. In this strategy, we are taking advantage of market volatility and support and resistance levels.
The support and resistance levels give us price structure to zero in on in order to keep yourself from trading just anywhere on the chart. We are using price structure and not a moving average (dynamic support and resistance???? – no, not really) as in the end, price pays.
The Bollinger band will measure volatility in the market and when price action tests and there is a breakout of the upper band or lower band, we know that higher volatility has come into the market and this volatility breakout can be trading gold. This type of price action and market momentum can give us a trading edge that we can exploit.
Price action and momentum is one of the edges I look to exploit every single week in my free Forex setups and signals that are posted. Sign up for free so you can be alerted to the charts once posted!
The middle band, the moving average, can be used as indication of the current short term trend of the market you are trading. That said, by the very nature of this trading strategy, the breach of the Bollinger Band and support/resistance level will tell you which direction to trade in.
How To Trade Bollinger Band Breakout Trading Strategy
You can be a day trader or swing trader but I have always found day trading to be a harder go than swing trading. I did fine with day trading but I started trading to have more free time – day trading is a JOB.
You can use any time frame you like however for some guideline,
- You can use the one hour chart however keep profit expectations in line with the smaller swing potential
- Four hour charts are a nice separation between day and swing trading but there are many low volatility times in Forex and you may be seeing a band squeeze which would be common during sessions like Asian
- Daily charts are my preference for a lot of reasons especially because there is a lot of random types of movement in Forex.
Currency pairs are up to you but also keep in mind that some currency pairs move more than others. During your testing of the Bollinger Breakout strategy, you may consider sticking to the major currency pairs and perhaps the EURJPY.
Of course we are using the Bollinger Band indicator with a setting of 20 for the moving average and a standard deviation of 2.
The blue arrows point to where candlesticks have setup:
- Price breaks a support or resistance level
- Candlestick closes outside the upper or lower Bollinger Band before or after a breakout of S/R
You may want to decide that for a proper price structure level, you need two touches of a horizontal trend line to validate a support or a resistance level. Of course on the lower time frame you may have many structure levels that are tested many times.
On the daily chart, you may be looking at singular pivot areas that may or may not be support or resistance. That is why you may need to see price at that level twice before considering it a valid level.
Stop Loss and Targets
You may want to use either an ATR stop or simply place your stop loss below the setup candlestick for a buy or above the setup candlestick for a short.
Targets can be multiples of your risk or target opposing price structures. You can also use an indicator that may be suitable for that purpose to keep your profit taking objective.
Daily Chart Breakout
Using the daily chart with the Bollinger Band breakout actually gives traders long and short term trades. For this type of trading, we will use trend lines on our charts and you should have a way of drawing your trend lines on a consistent basis.
You can see the smaller trade is 250 pips and we use the measured move technique for trend lines. We will project 2 X the distance from the lowest low to the down sloping trend line. You can see price consolidated in that area before breakout to the upside again.
The larger trade is the long trend line and that trades up 860 pips. The technique for measuring is the same and if you have questions about that, please leave a comment below.
The stop loss can be the same as the horizontal trend line with Bollinger Band method.
Why This Method?
The Bollinger Band gives us normal price volatility through the standard deviation calculation. When price exceeds the upper or lower band, we can consider that it is a new move underway that has some type of momentum behind it.
Adding in support and resistance levels takes advantage of price points that many traders look at. When we get areas that have the potential to exhibit order flow along with a measure of the market volatility during a breakout, you are setting yourself up with a trading edge that you can replicate day after day for long term success.
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